The Economist: Texas Taxes
By Ray Perryman
Nov. 3, 2012 at 6:03 a.m.
The Tax Foundation's annual ranking of state and local tax burdens is out, and (once again) Texas falls among the lowest. For 2010, Texans paid some $3,104 in state and local taxes, measured on a per-capita basis. Comparing to per-capita income of $39,142 yields a state-local tax burden of 7.9 percent, which ranks 45th. By comparison, in top-ranked New York, the burden is $6,375 (12.8 percent). In New Jersey it's $6,689 (12.4 percent), and for third-ranked Connecticut, the burden is $6,984 (12.3 percent). At the other end of the spectrum are Alaska with $3,214 (7.0 percent) and South Dakota at $3,035 (7.6 percent).
It is important to note that the burden calculated is the total state and local taxes paid by state residents, to both their own and other governments, divided by each state's total income. This way of measuring differs from simply looking at taxes collected in that the Tax Foundation adjusts for things like visitors from out of state paying sales tax in Texas, which would be adjusted out, or a Texan paying property tax on a second home in New Mexico, which would be added back in.
For states with high tourism, such as Nevada or Florida, or with large tax collections from natural resources, such as Alaska or South Dakota, this distinction is very important in that the ability to bring in taxes from out of state can reduce the responsibility for residents. In Texas, oil and gas operations generate severance taxes; ultimately, however, these are borne by consumers of petroleum products wherever they may live. While attempting to shift tax burdens to people from out of state is no policy prescription, it is nonetheless important to understand that such shifts do occur.
This is clearly one arena where ranking low is good. Lower taxes reduce the cost of living as well as the cost of doing business. Texas consistently falls at the low end of the rankings and has for decades. One of the major factors at work is the lack of a state income tax. Nationwide, individual income taxes generate about 20 percent of total state and local collections.
Even though it is gratifying to compare well on this measure, we shouldn't be too quick to celebrate. After all, the entire reason for taxing is to provide for quality schools, infrastructure, public health and safety and other essential government functions. It is certainly possible to undertax, putting future growth prospects and quality of life at risk.
The real issue is not to drive taxes down as low as possible but rather to be efficient and prudent in the use of public resources and to allocate the tax burden such that it is as fair as it can be while minimizing the consequences for business activity and decision-making. If taxes result in a significant disincentive for businesses to invest, expand and create jobs, all Texans lose. If taxes don't generate enough to take care of our needs, all Texans also lose.
The Texas tax system has some significant problems. We rely too heavily on property taxes, which are a notoriously unstable source of growth for revenues. The tax also suffers from the fact that increased property values often bear little relation to financial liquidity and, thus, ability to pay. In addition, capital-intensive industry ends up shouldering a disproportionate share of the load, while services industries pay relatively less. Moreover, the sales tax is under increased pressure due to dilution from a half-century of exceptions and breaks and the challenges of capturing the increasingly important online purchases. All in all, the state's outmoded system poorly reflects changes in the Texas economy. A full discussion of taxes is a topic for another day, but suffice it to say, there is definitely room for improvement.
It's good to see Texas compare well, and keeping taxes in check is a worthy goal. As we look to the future, however, we need to be sure the overall system is structured to generate sufficient revenue to meet the legitimate needs of a rapidly growing and changing population in the most efficient manner possible.
Dr. M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.